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July 11, 2003
The mortgage market spun out of control early this week, as 30-year
rates soared to 5.75%. A sell-off in stocks and more news of a poor job market produced improvement to 5.50%, but the rally was a grudging, effortful affair. The ten-year T-note, touching 3.07% only three weeks ago, has settled near 3.70%.
Mortgages are exposed to further and durable increases until markets can measure the reality of the rosy, 3.5%-4.0% forecast for 2nd half 2003 economic growth, and the equally grand expectations for corporate earnings.
We might get some relief from Mr. Greenspan's appearance in Congress on Tuesday, if he returns to his springtime Smilin' Alan routine, and tries to jawbone long-term rates back down. However, an opaque performance is more likely, as he is as curious about a 2nd half acceleration as anyone.
Discussions about the state of the economy and its future are unnecessarily clouded by constant use of terms appropriate to other times and places. Three in particular: "deflation," "recovery," and "double-dip."
True deflation, a sustained decline in the general price structure, is characterized by the widespread disappearance of money; here, in the 1930's, deposits were lost entirely in some 17,000 bank failures. Japan's unique deflation involves the economy-wide preservation of failed businesses, which makes it impossible for non-embalmed competitors to make money.
Mr. Greenspan has been very careful to speak of the potential for an "unwelcome decline in inflation", not deflation. Gleefully gruesome hopes for the latter helped to produce record-low long-term rates this spring, but the actual threat is too remote to bet on. The .1% decline in the core producer price index announced today is not even unwelcome, let alone a sign of deflation.
Chatter about "recovery" is corrosive because it promotes the idea that we have been in a normal post-WW II recession/recovery cycle. We are not: we are in a post-bubble environment beyond the experience of anyone alive, and to which parallels on historical charts are mostly irrelevant.
Recovery thinkers have pronounced for two solid years that unemployment is a "lagging indicator", and insist that signs of continuing distress in the job market have nothing to do with a recovery certain to be underway. This week's initial claims for unemployment insurance rose again, still way above the 400,000 mark, which is one hell of a lag from a recession that happened two years ago.
Prognosticators say that long-term rates will not return to their recent lows unless the economy "double-dips." I buy the dip part, but not the double. Since the quarters of actual GDP contraction in 2001 ("recession"), we have already had the double dip (summer into fall 2002), and just concluded a triple. March-May 2003 was awful, but 1.5% or so GDP growth was not a recession –- just slow enough to produce a new record low in long-term rates.
In mid-summer guesswork here, it seems likely to me that the economy will continue this serial-dip experience until we work through the bubble after-effects. We will tend to get a couple of decent quarters, not enough to produce self-reinforcing job growth, or big (real) profits and a corporate-spending spiral, and then dip back into anemia for a quarter.
The newest post-bubble work: we are just now beginning to feel the fiscal adjustment at state and local governments everywhere. As grim knowledge dawns that bubble revenue won't be back, and spending must be cut and taxes raised, local governments are raining layoffs from the safest, most recession-proof of all jobs.
We are not going to recover in some classical surge; we are in an extended process of working our way back to baseline. Then we'll surge.
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